Brexit – The tax implications

Date

Sep 06, 2016

Categories

Tax VAT

The initial economic and emotional response to the UK’s vote to exit the EU is now behind us, but it still leaves much conjecture and ambiguity. One of the areas which will be impacted by our separation from Brussels will be tax, because going forwards we will be in a position to set our own tax laws.

Significant tax changes currently require “State Aid” approval, and many of our recent tax changes have been dictated by the EU. One such example is the extension of Furnished Holiday Letting tax treatment to EU properties.

 

New Chancellor, a new tax strategy?

George Osborne, a leading member of the “remain” campaign, pledged to cut corporation tax to encourage investment in the UK in response to the referendum result. In an interview with the Financial Times, the former chancellor said he would reduce the rate to below 15%, although he did not mention any timescales. Whether the new chancellor, Phillip Hammond, will adopt a similar approach to corporation tax – and whether any cut would apply to companies of all sizes – remains to be seen.

 

Possible VAT changes

VAT is the one tax that is likely to see the most significant changes as a result of leaving the EU. VAT is a European tax. Withdrawal from the EU means that UK VAT law will no longer be governed by the EU VAT Directive. However, it is well known that it will take 2 years following the UK’s notification of Article 50 before we leave the EU. So until then, businesses will trade as normal, with business to business trade (“B2B”) in the EU being largely VAT and Duty free.

In the Budget 2016 it was announced that VAT would raise £138bn revenue for the UK Treasury in 2016/17, second only to income tax and about £100bn more than corporation tax. Therefore, it is expected that VAT or something equivalent will remain in place as an important revenue raiser for the UK, but the UK will in future have more freedom to set VAT rates. On the plus side, more zero-rating may emerge, whereas on the downside VAT may be raised above 20%, to cope with a possible recession and to generate additional revenue.

The biggest VAT impact will be the change to Intra-EU trade. At the moment B2B transactions are zero rated for VAT purposes. In future such sales will be imports into the EU and subject to EU VAT, which has a number of potential consequences. One advantage is that there will be no more Intrastat or European Sales Lists (ESLs) for UK businesses to complete.

However, businesses and their advisers will need to consider the following points:
• Will a local EU VAT registration be required?
• There will be increased freight agent costs of arranging imports and exports. There will also be a requirement to “enter and clear goods”.
• Whilst UK businesses should still be able to recover VAT on overseas expenses, the system is paper based and is a more onerous and lengthy procedure.

 

Possible Customs Duty changes

This has a potentially major impact and very much depends on the negotiation of a Free Trade Agreement (“FTA”) with the EU. Without an FTA, the normal World Trade Organisation tariffs apply.

For example, a UK car manufacturer selling cars to its French subsidiary would incur a 10% duty tariff being imposed on the transaction. Therefore, an FTA is critical to businesses with EU supply chains.

 

Key milestones in the Brexit process are:

• UK notification to the European Council of its intention to withdraw from the EU under Article 50 of the Treaty on European Union. This is not expected to take place in 2016, but once Article 50 is triggered, the UK will leave the EU two years later (unless all other EU member states agree to an extension of that period).

• European Council’s adoption by consensus of the guidelines for the EU mandate to negotiate and complete the Withdrawal Agreement. The timescale for the negotiation is not set and may well take longer than the original two year Article 50 timeframe.

• Discussion surrounding trade deals with EU and non-EU countries. Non-EU country trade deals are already being discussed now, but Germany and France have publicly stated that the EU trade deal negotiation will not commence until Article 50 is triggered by the UK. It is expected that the negotiations will take place during the post Article 50 notification, thus allowing a quicker resolution after the conclusion of the Withdrawal Agreement. If new trade deals are not negotiated in the two year period (plus any extension), then the UK could potentially have to fall back on World Trade Organisation trade principles (which impose tariffs on certain goods and services) until the trade deals are finalised.